Ambassador Bolton Warns of Potential U.S. Secondary Sanctions Against Venezuela

HIGHLIGHTS:

• National Security Advisor Ambassador John Bolton issued a statement threatening sanctions against non-U.S. banks for facilitating illegitimate transactions with certain Venezuelan individuals and entities.
• This statement highlights the ambiguities in U.S. sanctions regarding the imposition of "secondary" sanctions on non-U.S. entities for transactions with no U.S. nexus.

The White House on March 6, 2019, published a statement by National Security Advisor Ambassador John Bolton "putting foreign financial institutions on notice that they will face sanctions for being involved in facilitating illegitimate transactions that benefit Nicolas Maduro and his corrupt network."

Is the U.S. Moving Toward Secondary Sanctions on Venezuela?

The Bolton statement is important because up until this point, the U.S. sanctions on Venezuela have largely been viewed as being a "primary sanctions" regime that only applied where there was a U.S. nexus to the transaction (such as use of the U.S. financial system), rather than the broader sanctions programs against Iran and certain Russian entities that have "secondary sanctions" implications (i.e., that can be assessed against a non-U.S. entity for engaging in certain conduct or with entities regardless of U.S. nexus). In fact, following the designation of Petróleos de Venezuela, S.A. (PdVSA), the Venezuelan government oil company, as a Specially Designation National (SDN), the Office of Foreign Assets Control (OFAC) issued guidance indicating that U.S. sanctions would not apply to non-U.S. companies for buying petroleum products from PdVSA where there was no U.S. nexus (OFAC FAQ No. 657).

However, the key Venezuela-related executive orders are similar to many OFAC "blocking" orders in that it allows for sanctioning of any person that is determined to have "materially assist, sponsored, or provided financing, material, or technological support for, or goods or services to or in support of" an SDN. Hence, there has always been legal basis to impose sanctions on non-U.S. entities, even where there is no U.S. nexus for the parties or the transaction.

Does the Bolton Statement Apply to All Venezuela Transactions?

The intent of the statement appears to be targeted only to certain transactions. Ambassador Bolton warns foreign financial institutions regarding "illegitimate" transactions that benefit Maduro and his corrupt network. On its face, it would not appear to apply broadly to all transactions involving Venezuela or "legitimate" transactions with PdVSA. This client alert attempts to unpack this statement:

• Foreign Financial Institutions. This may be a public signal to non-U.S. banks holding assets of the Venezuelan government (such as gold) not to repatriate such assets, as there is a risk that senior Venezuelan officials could abscond with such funds.
• Maduro and his Corrupt Network. The statement singles out Maduro and his corrupt network. Maduro and many Venezuelan individuals were sanctioned under Executive Order 13692, which targets among others persons responsible for undermining the democratic process in Venezuela, and those engaged in public corruption in Venezuela. (See Holland & Knight alert, "Treasury Designates Additional Maduro Officials, Provides Additional Guidance," Feb. 19, 2019.)
• Illegitimate Transactions. While "illegitimate" is not defined in the relevant sanctions orders, this appears to clearly target corruption, money-laundering and other attempts by targeted individuals to appropriate or siphon money paid to Venezuelan government instrumentalities such as PdVSA. Executive Order 13850 under which PdVSA was sanctioned also provides for sanctioning of any person complicit in, or directly or indirectly engaged in transactions involving deceptive practices or corruption and the Government of Venezuela, including its instrumentalities. The U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) has issued several advisories on the money-laundering risks. (See Holland & Knight alert, "OFAC Designates Petroleos de Venezuela S.A.; U.S. Expands Sanctions on Venezuelan Government," Jan. 30, 2019.)

What Are the Practical Implications of This Statement?

Given the huge penalties the U.S. government has levied against certain foreign financial institutions for sanctions violations, many non-U.S. banks have already put in place "derisking" policies to limit their exposure with respect to Venezuelan sanctions. Such policies range from enhanced diligence on transactions to a blanket prohibition on processing Venezuela-related transactions. This overt threat of secondary sanctions from a senior U.S. government official will likely accelerate that bank derisking and further isolate Venezuela from the world financial market. In particular, while this statement does not specifically target financial transactions involving oil exports from Venezuela, it is expected that this will have a chilling effect on such transactions.

For non-U.S. entities currently trading in Venezuela, it is important to not only assess legal risk but also the practical risks, as financial institutions, insurers and counterparties with strong U.S. ties may have a very different risk analysis with respect to ongoing transactions with certain Venezuelan entities, or with Venezuela as a whole.

How We Can Help

Holland & Knight has established a multidisciplinary Venezuela Focus Team to advise clients in financial industry, maritime and other sectors on these issues. For further assistance or answers to specific questions, please contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.